Compensation and benefits

Compensation and benefits (abbreviated “C&B”) is a sub-discipline of human resources, focused on employee compensation and benefits policy-making.

It is also known in the UK as “total reward” and as “remuneration” in Australia and New Zealand.

The basic components of employee compensation and benefits

Employee compensation and benefits are basically divided into four categories:

1. Guaranteed pay – monetary (cash) reward paid by an employer to an employee based on employee/employer relations. The most common form of guaranteed pay is the basic salary.

2. Variable pay – monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance or results achieved. The most common forms are bonuses and sales incentives.

3. Benefits – programs an employer uses to supplement employees’ compensation, such as paid time-off, medical insurance, company car, and more.

4. Equity-based compensation – a plan using the employer’s share as compensation. The most common examples are stock options.

Guaranteed pay Guaranteed pay is a monetary (cash) reward.

The basic element of the guaranteed pay is the base salary, paid based on an hourly, daily, weekly, bi-weekly or a monthly rate. The base salary is typically used by employees for ongoing consumption. Many countries dictate the minimum base salary defining a minimum wage. Individual skills and level of experience of employees leave room for differentiation of income-levels within the job-based pay structure.

In addition to base salary, there are other pay elements which are paid based solely on employee/employer relations, such salary and seniority allowance.

Variable pay

Variable pay is a monetary (cash) reward that is contingent on discretion, performance or results achieved. There are different types of variable pay plans, such as bonus schemes, sales incentives (commission), overtime pay, and more.

An example where this type of compensation plan is prevalent is the real estate industry and real estate agents. A common variable pay plan might be the sales person receives 50% of every dollar they bring in up to a level of revenue at which they then bump up to 85% for every dollar they bring in going forward. Typically, this type of plan is based on an annual period of time requiring a "resetting" each year back to the starting point of 50%. Sometimes this type of plan is administered so that the sales person never resets and never falls down to a lower level.

Benefits

There is a wide variety of employee benefits, such as paid time-off, insurances (life insurance, medical/dental insurance, and work disability insurance), pension plan, company car, and more.

A benefit plan is designed to address a specific need and is often provided not in the form of cash.

Many countries dictate different minimum benefits, such as minimum paid time-off, employer’s pension contribution, sick pay, and more.

Equity-based compensation

Equity based compensation is an employer compensation plan using the employer’s shares as employee compensation. The most common form is stock options, yet employers use additional vehicles such as restricted stock, restricted stock units (RSU), employee stock purchase plan (ESPP), and stock appreciation rights (SAR).

The classic objectives of equity based compensation plans are retention, attraction of new hires and aligning employees’ and shareholders’ interests.

Organizational place

In most companies, compensation & benefits (C&B) is a sub-function of the human-resources function.

HR organizations in big companies are typically divided into three: HR business partners (HRBPs), HR centers of excellence, and HR shared services. C&B is an HR center of excellence, like staffing and organizational development (OD).

Main influencers

Employee compensation and benefits main influencers can be divided into two: internal (company) and external influencers.

The most important internal influencers are the business objectives, labor unions, internal equity (the idea of compensating employees in similar jobs and similar performance in a similar way), organizational culture and organizational structure.

The most important external influencers are the state of the economy, inflation, unemployment rate, the relevant labor market, labor law, tax law, and the relevant industry habits and trends.

Bonus plans

Bonus plans are variable pay plans. They have three classic objectives:
1. Adjust labor cost to financial results – the basic idea is to create a bonus plan where the company is paying more bonuses in ‘good times’ and less (or no) bonuses in ‘bad times’. By having bonus plan budget adjusted according to financial results, the company’s labor cost is automatically reduced when the company isn’t doing so well, while good company performance drives higher bonuses to employees.
2. Drive employee performance – the basic idea is that if an employee knows that his/her bonus depend on the occurrence of a specific event (or paid according to performance, or if a certain goal is achieved), then the employee will do whatever he/she can to secure this event (or improve their performance, or achieve the desired goal). In other words, the bonus is creating an incentive to improve business performance (as defined through the bonus plan).
3. Employee retention – retention is not a primary objective of bonus plans, yet bonuses are thought to bring value with employee retention as well, for three reasons: a) a well designed bonus plan is paying more money to better performers; a competitor offering a competing job-offer to these top performers is likely to face a higher hurdle, given that these employees are already paid higher due to the bonus plan. b) if the bonus is paid annually, employee is less inclined to leave the company before bonus payout; often the reason for leaving (e.g. dispute with the manager, competing job offer) 'goes away' by the time the bonus is paid. the bonus plan 'buy' more time for the company to retain the employee. c) employees paid more are more satisfied with their job (all other things being equal) thus less inclined to leave their employer.

The concept saying bonus plans can improve employee performance is based on the work of Frederic Skinner, perhaps the most influential psychologist of the 20th century. Using the concept of Operant Conditioning, Skinner claimed that an organism (animal, human being) is shaping his/her voluntary behavior based on its extrinsic environmental consequences – i.e. reinforcement or punishment.
This concept captured the heart of many, and indeed most bonus plans nowadays are designed according to it, yet since the late 1940s a growing body of empirical evidence suggested that these if-then rewards do not work in a variety of settings common to the modern workplace. Research even suggested that these type of bonus plans have the potential of damaging employee performance.